Fund Companies, Brokerages Settle Market Timing Charges

Four fund companies
and three brokerage firms have settled OSC and IDA charges that they allowed a
few large clients to rapidly trade in and out of funds, to the possible
detriment of other longer term clients. Interestingly, this is a record settlement, for actions which were not illegal, and
that their clients (not the firms themselves) undertook,

As we stated in the September Issue, we do agree that the fund companies were lax in their monitoring of
client trades. We are very pleased that any fines will be paid, not to
the legislators, but will actually make it into the accounts of unitholders
of funds that may have been affected.

What does this means to long term fund holders?

Investors who were in the affected foreign funds in 1999-2003 will see a credit to their
accounts sometime in 2005, once the fines can be appropriately
prorated and dispersed. For most clients, it means a potential .5% increase in
their fund value. As an example, it is
estimated that a typical CI unit holder with a $5,000 will receive approximately
$37. Considering that relevant proportional estimate of what CI earned
by allowing
the market timers to trade is on average $6, that is a stiff penalty indeed.
In AIC's case, the fine is over 50 times the net amount of management
fees they earned on the assets during the period the timers were in the
funds.

We are glad that this period of uncertainty is behind the fund
industry, and that there have been policies in place for almost 2 years now,
that have prevented any further abuses. Investors, advisors and
the money managers can now once again focus on the long term prospects
for their funds. Please contact us if you have any questions
or concerns.

More on the fund company settlements ...

Here is a complete list of the statements from each affected fund
company which provide more details.

Labour Funds Review

Performance

Labour funds have "laboured" to produce returns over the last 5 years.
Most were heavily invested in technology companies in 2000,
and with just a few exceptions, returns for the entire category have been
challenging after a great run up in late 1999.

Luckily, the tax break provided by LSIFs has offset their lack-lustre
performance. On a cash-on-cash after-tax basis, whether inside or
outside the RRSP, most LSIFs with an 8 year history have generated positive
returns on investors' capital, even if nominally the fund has a negative
return. As shown in the chart (below), all but one of the 12 most
popular LSIFs has returned a profit to the investor when held in an
RRSP, due to the tax credits received. So while fund performance has
been poor, the net outcome for individual investors has been good.

Fund Name

8 Year
Return To Nov 2004

Fund Assets

MER

End Value
of $3,500 Investment

After-tax Cost
(46% tax rate,
30% credits)

RSP Withdrawal After 8 Years
(46% tax-rate)

Cash on
Cash
Return Rate

Dynamic Venture Opps

6.8%

57.8

4.0%

$5,924

$840

$3,199

18.2%

Working Opportunity

4.1%

285.3

2.7%

$4,827

$840

$2,607

15.2%

VenGrowth Investment

1.1%

325.7

1.2%

$3,820

$840

$2,063

11.9%

DGC Entertainment Ventures

0.2%

3.6

5.5%

$3,556

$840

$1,920

10.9%

Retrocom Growth

0.0%

70.1

3.3%

$3,500

$840

$1,890

10.7%

Crocus Investment Fund

-1.6%

154.8

4.0%

$3,076

$840

$1,661

8.9%

Capital Alliance Ventures

-2.1%

42.3

3.8%

$2,953

$840

$1,595

8.3%

First Ontario

-2.8%

47.3

5.0%

$2,789

$840

$1,506

7.6%

Cdn Medical Discoveries

-2.9%

290.2

3.7%

$2,766

$840

$1,494

7.5%

Covington Fund I

-4.0%

93.0

4.9%

$2,525

$840

$1,363

6.2%

GrowthWorks WV Cdn

-4.7%

260.9

5.5%

$2,381

$840

$1,286

5.5%

Triax Growth

-10.4%

87.5

3.3%

$1,454

$840

$785

-0.8%

Labour Fund Industry Factors

LSIF industry factors are also reason for caution. The proliferation of new smaller LSIFs in recent years has left the industry ripe for
rationalization. Last year,
several smaller LSIFs were launched, and struggled to capture enough
assets to be economically viable. The market just will not accept the
high management fees (MERs) required by small funds. Economies of
scale are a critical factor in operating an LSIF. Hopefully, legislation will allow fund
mergers of these smaller funds in the future.

Even among the larger funds, there have been some difficulties. While we generally only
comment on Ontario LSIFs, the Manitoba Crocus LSIF, has
just suspended redemptions for 6 weeks, as they review the pricing of
their investment holdings, subsequent to the resignation of several key
personnel.

What to do in 2005?

While we have concerns over LSIF performance & dynamics of the
industry, they are still a suitable investment for many investors,
especially if you are looking for a way to reduce your tax bill.
Balance, as always, is the key. For portfolios over $100,000, LSIF
investments could, in most cases, make up 5% of the portfolio while
still maintaining balance. We will continue to recommend the larger
and more established funds for those clients seeking LSIF tax breaks and
encourage clients to hold them in RRSP accounts, if possible.
Remember, each case is unique so contact
us for advice on your particular situation.

For clients who own LSIFs, we are not recommending any changes that
would incur penalties. For those clients who purchased LSIFs in 1997 or
earlier, you will be eligible to
sell them without incurring any tax or sales penalties. We will
be in touch with those clients who are eligible to sell and, depending on
your situation, we may recommend rolling over your LSIF into the same or
similar fund to get the tax credits again. If you have 8 LISFs, you could continue to roll over
one each year, without increasing your exposure to the sector.

An interesting note for clients approaching retirement - a LSIF does have the advantage of
essentially being a tax-free RRSP or RRIF withdrawal. If you invest
$5,000 in an LSIF (whether it grows or not), you get $1,500 or $1,750 out of the
registered account as a tax credit. Contact
us to find out more on this idea.

More on Labour Funds ...

Trimark Funds vs. Real Estate

Trimark recently published a report showing the performance of property prices in major urban centres in
Canada. Using a 23 year history, it is interesting that some
housing markets haven't even kept up with inflation (eg. Halifax). Other areas,
like Toronto and Vancouver, have seen good growth, but even then, an
investment of the average house price in either of Trimark's two original funds, produced
significantly higher returns in all cities (see chart, below).

This is not a simple matter for comparison. This analysis does
not assume mortgage interest costs, real estate commission, taxes, and insurance
which would reduce the real estate returns. Nor do they include potential rental
income which could increase real estate returns, but would then make the
real estate growth taxable if it is not a principal residence. Fund returns
are stated after
management fees so they do reflect real returns, but not taxes which
would reduce returns.

The most important point is really that there is no asset class that
doesn't have a "management" fee. For an investment property, while
looking at the change in market value for the housing index over time is
interesting, there is no way to invest in property without fees.
The management fee on property (insurance, maintenance, taxes etc.) is
like the MER on a mutual fund. What ultimately matters is the
return after fees.

When considering property as an investment, we would generally
recommend trying to maximize RRSP contributions, then pay off your
primary residence, as it provides a vehicle for tax free growth, then
look at RESPs and only then trying to save in a taxable account or
purchase investment property.

More on Funds vs. Real Estate ...

Trimark
Report - The original Trimark Funds vs. Real Estate report that was
the inspiration for this articleCosts of Home
Ownership - From AIC, the costs of home ownership and why also
investing in other asset classes like stocks and income trusts makes sense
Other
Investor Learning Pieces - Also from Trimark, here are some more interesting "investor learning" pieces

Fun With Numbers - The Big Mac Index

With the rise in the Canadian dollar over the last year, and the
decline of the US$ globally, it makes sense to think about the future
direction of currencies. In finance, there is a theory called
"Purchasing Power Parity", (see
excellent UBC link on PPP) or the "Law of One Price" that says that if two identical
baskets of goods and services are priced differently in two different
countries, eventually, the currencies should move to make the two baskets
equal after the currency exchange.

The Economist
magazine finds that a completely homogenous basket of goods and
services in the world is difficult to find. Interestingly, the most consistent
product worldwide is McDonalds Big Mac, which includes food, labour,
packaging, rent and marketing in its price. From the Economist's
Big Mac Index, we find that the Euro is currently
overvalued, and the Chinese currency is undervalued, as is the Canadian
dollar. While the Big Mac index is presented somewhat tongue in
cheek, it has proved remarkably accurate at predicting long term
currency trends.

Based on PPP (and not just the Big Mac Index!), the Canadian dollar should be around
$.85-$.90
US, which makes sense, since right now Americans still find Canada cheap
for shopping, but not as much as they used to.

http://www.investmentawards.com/awards/winners/2004
lists the 2004 winners of the Canadian Investment Awards, recognizing
long term investing. The Advisor's Choice Favourite Investment
Fund Company of the Year, was AIM Trimark Investments. We would be
pleased to advise on and, if appropriate, help you invest in any of the funds that were
recognized.

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The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.